Servcorp Limited (SRV) Earnings Call Transcript

Well, good afternoon. I've even got a mic on today, which is unusual. And I guess everybody has seen the Servcorp numbers. So I will just touch on the highlights. The underlying result, $84.9 million free cash. Net profit up 23% to $69 million. Underlying operating revenue, $332 million, underlying operating profit, up 27% to $68 million, underlying earnings per share, up 25%. Statutory results, I'll just go down to what I normally look at. Earnings per share, $0.538, which is an all-time record for Servcorp. And then I go straight on to record underlying net profit before tax, record earnings per share, record dividend like Servcorp. And the thing that amazes me when I look at the video is how Servcorp's grown and what a fantastic team we have and sometimes at the biannual international management meeting, I get amazed by the quality of the teams. But a winning team is always a much happier team. And so when I look at the Servcorp teams, I think we've got about 5 million options out there, maybe a little more. And I look at the areas we're winning in, that's happy group. And if you look at the world, Australia just had its best 5 months for 7 or 8 years. The U.S. is not just cash positive, it's in profits. And last month, being last month, July, made around $300,000. And last year, it lost about $19,000. So the only reason I quote that one number is not because it's so spectacular, it's because it's an example of what's happened in Servcorp overall. Culturally, our own teams are starting to understand the difference between Servcorp and the competition. And I never see anybody mention, and I see all these write-ups on WeWork end. But the very first operator of co-working in the world was Servcorp. And it wasn't just the first co-working operator by a short amount, it was the first co-working operator by close to 20 years. It started it and it was called company headquarters. It then became networking and then computers came, so networking disappeared. We now call it co-working because WeWork and the American company spent so much money promoting the shared space concept that co-working was a name that became more widely known. So we started to call as co-working. And across the globe, we've got just over 60,000 clients pay us rent every month. And we have a different view on the world. If you look at everybody else in this business, they are looking at AI so that they can drop the number of people they have on a per office basis. And so right now, the industry average is around 1.7 per 100 offices. Servcorp runs 10 people per 100 offices. Most of these operators don't have communication systems, switchboards, incoming and outgoing lines. If you look at Spaces, the last one I looked at had 3 incoming and 3 outgoing lines. Servcorp next door had 30 and 30. Generally, it's about 20, 20. We've got about 40. They've got about max 6. And so when a client takes a Servcorp office or co-working, when they walk through the door, there's a receptionist that is live and on the spot. And their first month is free, and there's no further obligation. They don't have to sign a contract. If they don't like it, they can leave. And the average cost is about $400 a month, a bit less, but across the world, it's about $400. When you take it that we pay $12 million a month in rent, and they get access to every one of our locations and $400, I know I can see a look on these close faces is right at the top of the tree. That's the most expensive, but it goes from $150 to $400. But they get access to every Servcorp location. We signed for 10 years to try and give them security of tenure. I might add in this building, we were here for -- we go back a long way, guys, I signed with Bond Corporation who built this building, and there was Level 41 and 42, and Krug had their own Krug bar. Their family had the Krug bar upstairs before it was taken over by -- and that was all encouraged and funded by Alan Bond. And he was going to take the top 2 floors as his personal apartment. And then the whole thing went pear-shaped, same shape as Alan Bond, I might say he was pear-shaped. Anyway, and those guys, I thought sort of rode rough shot over Servcorp because they just looked at little Servcorp and thought, well, these guys don't count much. But in Australia, it hasn't changed all that much. If I look at Australia, let's [indiscernible] as late as usual, but that's okay. We don't mind they're the second biggest shareholder. Just in time to hear my wins, which will come in a minute. So I look at AI as an empowering tool because I've always looked at Servcorp as a corporation that would grow that not only job is to make money for its shareholders, but it's got to take care of its team members, and it's got to play a role in its community. Being an Australian company has its problems sometimes. If you use this building, we were here for 30 years, 30 years now, isn't it? Pretty well. And we'd always paid our rent. We'd signed with Bond Corp. But when Credit Suisse merged, that was a funny word actually. Anyway, it was gobbled up by UBS, best deal was [indiscernible], was gobbled up by UBS. They just said your leases ended, we won't renew it even though you paid your rent for 30 years. [ Piss off ]. Well, I remember, it takes a while, but we remember. So it's a little difficult. And people think we're shared space and all the big guys thought they'd never go into it. Well, they're the competition. So we've now got close to 2,000 competitors in Japan. And in Australia, in this city, I'm guessing about 200. That's a guess because I haven't looked closely. But nobody's put the infrastructure in. So people look at AI as an enabling product to reduce team members, not empower them. I disagree with that. The cost to build a Servcorp floor is between $4 million and $6 million a location now, whereas if you read our biggest competitor's annual report, they come in at less than $1 million, less than 1/4 of what we spend. And then they run between 7 and 8 team members per location or per 100 offices less than Servcorp. They all use external software, whereas we've written our own data system, which gives our clients a lot of power, and we can put clients up and take them down in pretty fast time. Unfortunately, I think I mentioned this at the last analyst meeting, was being -- the Wombat was being developed in Japan. And the Japanese had called it Wombat because it was an Australian company. And I looked at that and thought, Christ, we'll never keep that name. And of course, it got rolled out as Wombat. So we're stuck with the bloody name. The name doesn't aptly describe it because Wombat's warm, cuddly, slow, thoughtful, I think they say in Australia built like a brick shit house. But this is fast, updates every 15 minutes. It's in all of our currencies. It's global. It's in all of the languages that we have. And it will interact with the AI avatars that we are slowly but surely putting together. Now unless you had a data system, general ledger and interaction through your IT systems and unless you had an in-house IT team, you wouldn't have a database globally of all of your clients. And we're the only business center operator that has all their clients on one database across the globe. We will build. We are building. You have to actually have a little bit of patience, but we've started building our first avatars in Japan. One will be to help answer questions verbally and in writing on the website and then we'll have a 24-hour avatar concierge. It will have access to all the LLMs. And that will mean you'll have an avatar, which is genius and trained on Servcorp. We've started. When you have a look at what we've spent and written off over the years, in the last 7 years, I would guess it's between $20 million and $30 million just on our IT systems. We haven't capitalized very much of them, in fact, very little. We try to write as much off as we can as we go. There is only one complaint from this Chief Executive. I sat in a Board meeting and of course, we've given out 5 million options, which waters [ Alf's ] equity, which always gives me a pain. But my [ NEDs ] decided that even though it was legal, my options couldn't be at the same strike price as the rest of the Servcorp guy's options. And I think my salary is about $350,000. My options had to be after the announcement and when you were allowed to buy shares. Now while it's only a very small amount of money compared to the way the share price went up and the number of shares I own, in principle, as Chief Executive, I hate it, and I'll talk more about it at the Annual General Meeting. It just pisses me right off. I don't want any more. I just want exactly the same as my own team gets, and I'm not scared of the regulator. I am not scared of the regulator or the [ NEDs ], I might add. But I do respect my own team, and I want to be treated exactly the same as every other team member in Servcorp because they've all played a role, and I've been a part of that role over the last 5 or 6 years. So let's have a quick look at our avatar. This is [ Susie ] and she's only been trained on Japan so far, and she's pretty clunky. But boy, that's our landing page. I might add, when you talk about the infrastructure, nobody else has got an interactive landing page that takes you in 3 steps to a sign up, which everybody asks, why is nobody else making money? Well, so, hay [ Susie ] that's a pretty good demonstration. Susie -- why can't I hear [ Susie ] guys? I have a question, [ Susie ]. Does Servcorp have co-working in Marunouchi In Tokyo? You talked to that about right. In Marunouchi, Tokyo, we have co-working options available at several locations, including the Marunouchi Trust Tower and the Marunouchi Nijubashi Building. Would you want more details on the co-working patterns there? How much is a hot desk in Nijubashi? At the Marunouchi Nijubashi Building, our co-working concept is available, JPY 27,500 a month -- month-to-month basis. You can [indiscernible] first month with these increase with no further obligation. Do you want to know more about this option? Do you have co-working in Ebisu as well? Yes, we do. In Ebisu, Tokyo, we have the co-working option at the Yebisu Garden Place Tower. Do you need more details on the co-working pattern there? Feel free to ask. Do they have service -- does Servcorp have serviced offices in Ebisu? Yes, Servcorp does have office at Yebisu Garden Place Tower. Do you need more information, or just let me go through... Thanks, Susie. Guys, maybe you can kill Susie. Guys, this AI is real, as you all know, because you keep reading about it. But when you look at the way we are training our avatars, and we are so far ahead of anybody else because nobody else can put the infrastructure. Nobody else has got a database so that they can use an avatar as a genius, and it's all part of it because you see God gave us a lot of -- when I think about it, he gave us the air, all these stuff that we get for free. And in Japan, the railway works and the infrastructure makes a massive difference to everybody's business. And every little business guy needs the infrastructure. My problem is training my own team to understand how much better Servcorp is than everybody else. But as we slowly but surely train the team, I think we will continue to see improvement. And expansion in Servcorp only goes with the management team. As we get managers that can handle more, we'll spend more money. We'll continue to throw excess cash. But it's not the excess cash. It's what's in it for the client. When they walk in, if they've got 6 or 7 people to delegate to, that gives them a real chance to make money. If their WiFi is rocket fast, that gives them a real chance to make money. If they want to look or they want to use a concierge that has access to ChatGPT 5 and all the other LLMs, that's a real asset to them. They can ask verbally or they can do it in writing. They can use a mobile device. And John and his whole team around the world are currently working on building the avatar who will seamlessly work with and be able to monetize -- be able to be monetized so that we will be able to bill our clients through Wombat. I'm get tired of talking. That was all I wrote down. I've run out of stuff. Critical mass. I will say, though, funny enough, even though you've got -- we work on all of these guys, we currently probably have a few more co-working clients per location than anybody else on the globe. Anybody got any questions? I'm done.

[indiscernible].

Well, the Middle East is sort of booming or burning. It hasn't changed. I mean, the Middle East has its risks. And if you go into Lebanon, we lose money. Going into the UAE, where we've now got -- if you look 5 years ago, we had no competitors in the UAE. We now got about 100. And we just got a better product. And we've got more critical mass because we've been there for a while. So critical mass allows you to advertise because if you're running advertisements and you've got as many clients as we have, it's a small amount of their spend. It costs them less, too. And so we started first, and we're way ahead. So if you looked at Dubai, we were first. If you look at Saudi, we were first. Qatar, first. First player in the market gets a few advantages.

So what do you think the runway is over there? I mean, providing there's no burning [indiscernible]?

Well, I think the runway for the countries in the Middle East is a lot longer than a lot of people that are coming out of university right now when I have a look at the power of AI. So I think they've got a shorter runway. So I'm taking less risk than they are with their degrees. And if I look at some of the coders and what you can do and even writing ads, you can just put an ad in and say, I want to cartoon an ad and chat just chucks it out. I mean the average Joe talks about AI. But you should be worried about it. So there'll be a lot more small businesses and a lot less hours work. And then the Middle East, well, it's got a really young dynamic population. And the Middle East have woken up to the fact that private equity and all these guys and all the other charlatans used to roll into the place and roll out with their money have no better brands than they had. And so now they're investing in their own countries. And so I would think between 5 and 10 years if you're Servcorp. And I mean it, sorry.

Maybe you could touch on Japan and China. Obviously, China was a bit weaker and Japan...

Japan has got a great management team, and it's been consistent for -- in profit on its revenue for the last 10 years, longer. And so it took us right through the COVID crisis. I mean, if you have a look at Servcorp as a company, it's currently got more money in the bank than it raised ever in its whole life. That's everything from the initial float on. So it's got more money. It's got 140 centers. It's got no debt. And it's paid 50 dividends in a row. And it's got a pissed off Chief Executive. I mean, hello. Other than that, it's an okay company.

Which brings us to dividends. You've talked $0.30 next year. You've got a lot of cash [indiscernible].

Not for you guys, $0.30 is -- well, it's like buybacks. I have this real aversion and maybe dividend reinvestment, which was suggested is through. Buybacks are often driven by major shareholders that want to increase their percentage holding or they're driven by a Board that doesn't quite know exactly how to effectively invest their money. This is in my opinion. So I look at Servcorp and say, when you look at the cash flow and what's happening in the world, there will be some great opportunities in the property market, particularly now that we've got critical mass, some real estate, we looked at a little real estate play the other day and that we thought we could turn into co-working. It went at 30% above the price we paid for it. So maybe the time is not right. But remembering that we're not geographically tied, so there are ample opportunities. And my view on gearing is that if you buy real underlying real estate, you could borrow 50%, but no more because markets can go up and markets can go down. And if I look at the $0.30 dividend, if you go back to the original shareholding, right? And so we've now got more money in the bank than we've ever raised in cash, we paid close to 300%, 400%, Greg? We paid 395% back to those shareholders. That's enough.

We're very grateful.

Wow, maybe you will vote for me to get my options at the same price as everybody else.

Online question, Mr. Fred. From anonymous. Is there a management succession plan in place?

I worry about that if I die. Right now, I'm staying here.